Total Commercial Paper dipped $1.1 billion last week to $1.994 Trillion.
Total CP has increased $301 billion, or 17.8%, over the past 52 weeks. Total
CP has expanded at a 19% pace over the past 20 weeks.

January 23 - Dow Jones (Anusha Shrivastava): "Ratings upgrades hit a quarterly
record in the asset-backed securities market in the fourth quarter of 2006,
according to...Standard & Poor's... This was primarily due to the 'strong
performance of various auto loan and single-issue synthetic transactions,'
the report said."

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $805 billion y-o-y (19.5%) to a record $4.936 Trillion.

Currency Watch:

January 24 - Bloomberg (Will McSheehy): "Kuwait, the third-largest Arab oil
producer, may abandon the dinar's peg against the dollar in favor of a basket
of currencies to help minimize economic harm after the dollar declined. 'We
might go to a basket for an interim period,' Bader al-Humaidhi, Kuwait's finance
minister, told reporters... 'The dollar fell a lot against the euro last year,
but if we'd been linked to a basket we wouldn't have suffered' as much."

The dollar index gained 0.5% this week to 85.11. On the upside, The Thai baht
gained 5.1%, the Norwegian krone 1.7%, and the Uruguay peso 0.6%. On the downside,
the Polish zloty declined 2.4%, the Australian dollar 2.1%, the Hungarian forint
2.0%, the South African rand 1.7%, and the Mexican peso 1.5%.

Commodities Watch:

January 26 - Financial Times (Kevin Morrison): "Metal markets were buoyed
yesterday by supply concerns and news that China, the world's largest consumer
of metal, is using more copper than estimated. This extended nickel's record
breaking run to seven successive sessions, tin touched another near 20-year
high while copper rose by more than 2 per cent...data showed China's refined
copper consumption in 2006 rose 15.4 per cent, confounding sceptics who forecasted
a fall for the year."

January 26 - Bloomberg (William Bi): "China, the world's most populous country,
may struggle to meet its grain needs as farmland shrinks and rising demand
triggers shortages that can't be met by imports, the Ministry of Agriculture
said."

January 24: "Fitch Ratings says in a special report released today that it
expects the mortgage-backed securitization (MBS) issuance to lead the growth
in Japan's structured finance market this year, extending the rapid growth
seen in 2006. Fitch conservatively estimates that issuances in the Japanese
structured finance market in 2006 totaled approximately JPY10 trillion, following
an annual growth of 12%, cementing the trend seen throughout 2005."

January 25 - Bloomberg (Nipa Piboontanasawat): "China's economy grew 10.4
percent in the fourth quarter and inflation accelerated, prompting speculation
the central bank will raise interest rates for the first time since August.
Consumer prices climbed 2.8 percent in December, the most in nearly two years,
the National Bureau of Statistics said in Beijing today. The world's fourth-largest
economy expanded by 10.7 percent in 2006, the fastest in 11 years."

January 23 - Bloomberg (Yanping Li): "China still faces 'great' pressure from
a rebound in investment growth because banks have too much money available
for lending, said Han Yongwen, secretary general of the National Development
and Reform Commission. Overall fixed-asset investment in China is estimated
to have grown 24 percent last year, higher than the targeted level, Han said..."

January 21 - Bloomberg (Li Yanping and Christina Soon): "China's currency
regulator said it will ease rules for capital to flow out of the country this
year while making it harder for funds to enter, in a move to cap increases
in the world's largest foreign exchange reserves."

January 25 - Bloomberg (Nipa Piboontanasawat): "China's retail sales rose
at a faster pace in December. Retail sales climbed 14.6 percent last month
from a year earlier after climbing 14.1 percent in November..."

January 25 - Market News International: "Hong Kong's exports in December rose
13.7% from a year earlier...with growth decelerating from a 14.2% year-on-year
increase recorded in November..."

January 26 - Financial Times (Sundeep Tucker and Tom Mitchell): "Sir Richard
Branson's Virgin Group is in advanced talks to secure land in Macao, the Chinese
special administrative region, on which it intends to build a $3bn casino resort.
Macao overtook the Las Vegas Strip as the world's biggest gaming centre by
revenues in October."

India Watch:

January 26 - Bloomberg (Yoolim Lee): "Last year 'was the first year you could
feel the pulse' of India's presence at Davos, says K.V. Kamath, chief executive
officer of...ICICI Bank Ltd., India's largest lender... This year, the pulse
is racing. About 70 Indian business leaders are attending..."

Asia Boom Watch:

January 25 - Bloomberg (Seyoon Kim): "South Korea's economy slowed more than
expected in the fourth quarter as exports fell for the first time in two years
and consumer spending remained weak. Asia's third-largest economy grew 0.8
percent from the third quarter, when it advanced 1.1 percent..."

January 23 - Bloomberg (John Fraher): "Corporate chieftains are the most confident
in at least a decade as more than 2,500 business leaders...gather in Davos,
Switzerland, a survey showed. Ninety-two percent of 1,084 executives questioned
said they are 'confident' or 'very confident' about their prospects this year..."

January 22 - Bloomberg (John Fraher): "Lawrence Summers has a message for
investors heading to the Swiss mountain resort of Davos this week to toast
a year of booming returns and record bonuses. 'It's worth remembering that
markets were very upbeat in the early summer of 1914,' the former U.S. Treasury
secretary observes. While Summers isn't predicting the onset of another world
war, he and European Central Bank President Jean-Claude Trichet are among those
who are warning the more than 2,200 movers and shakers at the 37th annual meeting
of the World Economic Forum that they've become too complacent about risks
ranging from trade imbalances to terrorism. A glut of cheap money and the strongest
global economic growth in three decades have encouraged banks, private-equity
firms and hedge funds to bet that the good times will keep rolling."

January 24 - Bloomberg (John Fraher): "Surging demand for derivatives is making
financial markets more vulnerable to any slowdown in the global economy, said
economists and executives at the World Economic Forum. 'You can easily get
liquidity from the market every second for anything,' said Bank of China Vice
President Zhu Min at a panel discussion on the global economy in Davos, Switzerland.
'We really don't know what the risks are.' The use of derivatives grew at the
fastest pace in eight years during the first half of 2006 as a glut of cheap
money allowed investors to bet more borrowed funds in financial markets."

January 22 - Bloomberg (Jennifer Ryan): "U.K. house prices advanced in January
as bankers received their bonuses and a shortage of housing pushed up values
throughout the country, Rightmove Plc said. House prices rose...13.5 percent
in the year..."

January 23 - Bloomberg (Jennifer Ryan and Craig Stirling): "U.K. factories
raised domestic prices at the fastest pace since July 1995 as new orders rose,
a quarterly survey by the Confederation of British Industry showed."

January 25 - Bloomberg (Andreas Scholz and Rainer Buergin): "The German government
will next week raise its economic growth forecast for this year to just under
2 percent from 1.4 percent, a senior government official said..."

January 23 - Bloomberg (Sharon Smyth): "House prices in Spain are overvalued
by as much as 30 percent, creating the risk of a sharp decline that could hurt
economic growth, the Organization for Economic Cooperation said."

January 23 - Bloomberg (Tasneem Brogger): "Danish house-price inflation slowed
for a second quarter in the three months through December after the central
bank raised interest rates and the effect of new types of loans wore off. Prices
rose an annual 18.5 percent from 24.2 percent in the previous quarter..."

January 25 - Bloomberg (Tasneem Brogger): "Denmark's jobless rate unexpectedly
dropped to 3.9 percent in December, the lowest since 1974, fueling concern
that a labor shortage is set to push up wages and inflation."

January 24 - Bloomberg (Robin Wigglesworth and Beate Evensen): "A labor shortage
in Norway, which has the second lowest unemployment rate in Europe, is getting
worse, while the flow of foreign workers may slow, Finance Minister Kristin
Halvorsen said."

January 26 - Bloomberg (Svenja O'Donnell): "Russian retail sales rose at the
fastest pace in more than a decade as rising wages boost consumer demand and
economic growth. Retail sales grew a faster-than-expected 14.8 percent in the
year, up from an annual 13.9 percent in November..."

Latin American Boom Watch:

January 23 - Bloomberg (Alex Emery): "Peru's exports jumped by more than a
third to a record last year as demand from China spurred surging sales of copper,
gold and zinc. The country's exports soared 36 percent to $23.4 billion..."

January 25 - Bloomberg (Andrea Jaramillo): "Colombia's industrial output climbed
17.1 percent in November from the year-ago month, the national statistics agency
said."

Central Banker Watch:

January 26 - Bloomberg (Matthew Brockett): "Money-supply growth in the euro
region unexpectedly accelerated in December to the fastest pace in almost 17
years, increasing pressure on the European Central Bank to raise interest rates.
M3 money supply...rose 9.7 percent from a year earlier after gaining an annual
9.3 percent in November, the central bank said... That's the highest growth
rate since February 1990... Loans to the private sector rose 10.7 percent in
December from a year earlier after growing 11.2 percent in November..."

January 24 - Bloomberg (Robin Wigglesworth and Beate Evensen): "Norway's central
bank unexpectedly raised the benchmark deposit rate by a quarter point for
a third consecutive month to 3.75 percent to cap inflation and prevent the
economy overheating... Norway's economy has expanded for 11 quarters in a row,
the longest uninterrupted period of growth since at least 1978, bringing unemployment
to an 18-year low and spurring consumer spending."

January 26 - Market News International: "The People's Bank of China is 'seriously
concerned' about the rising consumer price index and gains in asset prices...'The
central bank is seriously concerned about CPI and asset prices,' said Yi Gang,
assistant governor of the PBOC..., on the sidelines of a conference here."

Bubble Economy Watch:

January 22 - Bloomberg (Vince Golle): "More U.S. companies said they plan
to boost hiring through the middle of 2007 even as labor shortages force up
wages, a quarterly survey by the National Association for Business Economics
showed. The poll found that a third of executives would boost payrolls in the
next six months, up from 29 percent last quarter. Thirty-five percent, the
most since April, reported that wages and salaries increased in the last three
months."

January 25 - Associated Press: "Homeowner insurance premiums will rise by
25% along the coast this year as a result of the rising cost of homes, higher
repair costs and a recent history of severe damage from storms, North Carolina's
Insurance Commissioner Jim Long said."

Financial Sphere Bubble Watch:

January 24 - Bloomberg (Bradley Keoun): "Merrill Lynch & Co. gave Chairman
and Chief Executive Officer Stanley O'Neal a 30 percent raise to more than
$48 million after he led the 93-year-old firm to record earnings and its biggest
profit gain in three years."

January 22 - Financial Times (Kevin Allison): "The amount of money poured
into US start-ups last year hit its highest level in five years as venture
capitalists threw cash at new deals in healthcare, consumer internet and alternative
energy, according to new data published on Monday. The study by Dow Jones,
VentureOne and Ernst &Young found that VC groups pumped $25.8bn into fledgling
US companies in 2006, an increase of 8 per cent over 2005....the total amount
invested was the highest since 2001..."

Mortgage Finance Bubble Watch:

January 22 - Financial Times (Jim Pickard): "The commercial property market
had another record year for investment in 2006 with $643bn of stock changing
hands, a jump of 33 per cent on the previous year. In spite of widespread predictions
that the global boom is unsustainable, institutions and private investors have
continued to pour money into shopping centres, offices and industrial parks.
Europe and Asia saw strong growth last year with volumes up 50 per cent and
48 per cent respectively, according to a survey by Cushman & Wakefield...
The trend comes amid a surge in both property prices and deal volumes that
can be traced back to the stock market collapse of six years ago. In the wake
of these falls in equity prices, many pension funds and other investors earmarked
more cash towards alternative asset classes, including property as well as
commodities, private equity and infrastructure. As prices were forced upwards,
pushing up total returns, ever more buyers have entered the market."

Real Estate Bubbles Watch:

December Existing Home Sales were reported near expectations at a 6.22 million
annualized pace. This was down 7.9% from December 2005. Average (mean) Prices
increased to $269,200, the highest level since August and unchanged from a
year earlier. The Inventory of Homes declined 300,000 to 3.508 million (low
since April), and the Months Supply of inventory declined to 6.8 months (low
since June). Existing Homes sales for 2006 were down 8.4% from 2005 to 6.648
million. And while 2006 was the weakest year of sales since 2003's 6.175 million,
keep in mind that Existing Home Sales averaged 3.993 million annually during
the nineties.

December New Home Sales were reported at a stronger-than-expected 1.12 million
annualize pace, the fastest pace since September - yet down 11% from a year
earlier. Average Prices were steady at $290,100, unchanged from December 2005.
The Inventory of Unsold New Homes declined 5,000 during the month (2-mnth decline
of 16,000) to 537,000, the low since January 2005. For the year, New Home Sales
dropped 17.3% from record 2005 levels to the lowest sales since 2003. For comparison,
sales averaged 698,300 during the nineties.

California December Home Sales were down 15.3% from a year ago. Median Prices
were up $20,290, or 3.7%, to $567,690 (2-year gain of $93,420, or 20%), the
highest level since August. The months supply of inventory declined from November's
7.4 months to 6.8 months, also a low since August. California Condo Sales were
down 18.1% from a year earlier, and Median Prices were down 2.5% to $420, 180.

January 24 - Bloomberg (Daniel Taub): "Home-loan defaults in California rose
to their highest level in eight years in the fourth quarter amid a slowdown
in sales of houses and condominium that made it harder for owners to sell their
homes and pay off mortgages. Banks and other lenders sent 37,273 default notices
to California homeowners in the fourth quarter, more than double the 15,196
sent a year earlier and up by more than a third from the 27,218 sent in the
previous three months...DataQuick...said..."

January 25 - Florida Association of Realtors: "Florida's housing market mirrored
the national trend in 2006, with sales of existing single-family homes slowing
to a more sustainable pace following a five-year run of record closings. By
year's end, a total of 180,037 homes changed hands statewide for a 28 percent
decrease compared to the 248,575 homes sold in 2005... At the same time, 2006
sales figures made it into the record books for several markets around the
state; 2006 also is expected to be the third highest sales year on record nationally...
Statewide, the median existing home sales price rose 6 percent to reach $248,300;
in 2005, it was $235,200."

January 26 - Bloomberg (Hui-yong Yu): "U.S. rents for prime downtown office
space rose 18.2 percent on average in 2006 as demand outstripped supply, and
they may climb as much as 15 percent this year, according to a Colliers International
report. Vacancies at the end of last year were 12.55 percent, down from 13.59
percent a year earlier... Vacancies are now the lowest this decade, and well
below the 16.4 percent level at the end of 2003..."

M&A and Private-Equity Bubble Watch:

January 24 - Bloomberg (Jesse Westbrook): "Wall Street firms are trying to
figure out how to finance leveraged buyouts of $75 billion or more, twice the
size of the largest deal on record, a Citigroup Inc. executive said. 'I have
talked about deals larger than $75 billion, conceptually,' Tyler Dickson, Citigroup's
global head of equity capital markets, said... 'I don't know when larger LBOs
will happen. People are discussing them.' Buyout firms...announced a record
$739 billion of leveraged buyouts last year, almost triple the 2005 total..."

Climate Watch:

January 25 - Bloomberg (Stephen Voss): "The changing climate is more threatening
than previously thought, a U.S. government study will show, the report's author
said. The six-month study was conducted for a U.S. national security entity
and will be published officially in coming weeks, said Peter Schwartz, chairman
of Global Business Network... 'The rate of climate change is much faster than
we all think,' Schwartz said at the annual meeting of the World Economic Forum
in Davos... 'There will be many extreme large weather events. It is more urgent
and catastrophic than we previously thought.'"

January 26 - Financial Times (Kevin Morrison): "John Howard, the Australian
prime minister, on Thursday announced the most ambitious attempt yet to overhaul
the drought-ridden country's inefficient water management system and improve
his environmental credentials ahead of elections later this year. But the success
of the A$10bn (US$7.8bn) plan could hinge on whether Mr Howard can persuade
the six state governments...to cede most of that power to the federal government..."

Fiscal Watch:

January 24 - Market News International (John Shaw): "The Congressional Budget
Office's revised budget and economic report, which was released Wednesday,
says the fiscal year 2007 deficit will be $172 billion and then will dip to
$98 billion in FY 2008. The updated CBO report gives economic and budget estimates
from FY 2008 to FY 2017. The report assumes that current spending and tax policies
remain. Among other things, the CBO estimates assume that a number of tax cuts
passed in recent years will expire. The CBO sees deficits of $116 billion in
FY 2009, $137 billion in FY 2010, and $12 billion in FY 2011."

Bloomberg's Tom Keene: "Your op-ed piece in today's Financial Times - it certainly
got my attention and many others here at Davos, and you do lead it with much
of the discussion at these meetings on a changed global economy. The headline
is classic El-Erian - "Complex Finance in a Brave New World Economy." First,
what's new now that's different, say, five or ten years from now?"

Mohamed El-Erian, CEO Harvard Management Co.: "I think what's new is you've
got a group of countries that have become systemically important in influencing
growth, trade and, critically, capital flows. And they behave differently
from what we've been used to. So the result is we're coming across
all these aberrations in markets - in economic behavior - that we're all
trying to explain. And unless we recognize that there are structural
changes, we tend to get stuck on a debate between what is sustainable
and what is less than sustainable, as opposed to what are the underlying
factors that are now in play..."

"What we are in right now is bit of a journey; a journey where global growth
is being supported by the coming on stream of these new economies. And where
the decisions to allocate their wealth is helping countries maintain relatively
low interest rates and relatively low borrowing costs overall. This is the
journey and the journey feels better than most people expected. But the jury
is still out as to what the destination looks like. And there are risks there
both of the economic and geopolitical perspectives..."

"We've had a dramatic revolution in financial instruments. The proliferation
of derivative-based instruments - that tend to decouple trading from the underlying
market- has allowed many investors to get involved in markets that otherwise
would have been difficult to access. You see this here in the United States
in terms of the exotic mortgage, which allows people to buy homes that they
couldn't otherwise afford. You also see it in terms of capital flows, in terms
of Credit default swaps, etc. If you step back and ask, "What is the major
change?" - is that the barriers to entry to these markets have come down,
with the result that liquidity and velocity has gone up."

Bloomberg's Tom Keene: "Are you concerned about the complacency that we see
here looking out this window - this gorgeous valley filled with CEO and executive
complacency? Is it remarkable where spreads are?"

Mr. El-Erian: "It's totally remarkable where spreads are. I think that it
would be wrong to think that spreads reflect the level of risk. They
don't - they underestimate the level of risk. But they're there because of
technical influences. So, the big message - and that's what I tried to emphasize
in the article today - is that what we normally are used to looking at
in terms of market signals - the shape of the yield curve, the level of volatility,
the level of risk spreads - all that is being distorted during this transition.
So, risks are not as low as risk spreads would suggest - volatility is not
as low as volatility measures would suggest. But there is a good reason why
these measures are distorted right now."

"Much of the discussion at the World Economic Forum in Davos has two themes.
First, the continued robustness of the global economy as defined by sustained
high growth and low inflation. Second, the steady rise in economic and financial
risks. The tendency is to treat these themes as competing and engage in an
interesting but inconclusive debate about their relative merits. A better
approach is to recognise that these themes are consistent with structural
changes in the world and seek to recalibrate the perspective used for defining
the way forward.

"In the past few years there has been an acceleration in the realignment
of the global economy. Two developments have been particularly important.
First, the productivity shock resulting from the absorption into the global
labour force of massive numbers of workers in emerging economies; and second,
the increase in commodity prices that has transferred wealth to raw material
exporters mainly in the emerging world.

"As a result a new set of countries now exercises a greater (and different)
influence on four key global variables: growth, trade, price formation
and capital flow. For some of these countries, the transition is nothing
short of a regime shift. The most visible is, of course, the move from
international debtor status to international creditor status, with the
concurrent provision of cheap funding back to countries such as the US.

"The systemic impact of this global realignment would have been less dramatic
were it not for a technical factor: the bout of financial innovation triggered
by the proliferation of derivative based instruments. This has reduced the
barriers to entry to almost all markets and encouraged the migration of capital
towards more illiquid and leveraged asset classes.

The interaction of these economic and technical changes has altered market
valuations, volatility, velocity and liquidity. No wonder various markets
seem to be sending conflicting signals. No wonder market participants are
having trouble predicting central bank policies, which are becoming more
tentative. No wonder economists cannot resolve debates on the outlook for
global payments imbalances... We should view these themes not as competing
but as part of a fundamental change in the global economy..."

I'll begin with the caveat that taking exception to Mr. El-Erian's analysis
is risky business. He is an astute analyst and forward thinker on global financial
and economic developments with few equals. And I certainly concur with his
view that we have been witnessing "a fundamental change in the global economy." I
will, however, attempt to expand upon his thinking and to do so from a competing
analytical framework.

Yes, as Mr. El-Erian explains, we now have a "group of countries that have
become systemically important in influencing growth, trade and, critically,
capital flows. And they behave differently from what we've been used to." This
is today a huge issue that goes way beyond derivatives and "barriers to entry." The
growing prominence of the "emerging" economies is only a subplot to the story,
and to appreciate the nuances of the unfolding storyline one must reflect back
upon the early chapters.

From my perspective, analyzing today's extraordinary global environment must
begin with the recognition of the profound role a weakened U.S. is playing
in this Monumental Shift in Global Market and Economic Power from the "Core" to
the "Periphery." A previous chapter included the episode where the Greenspan
Fed in the early-nineties acquiesced to Wall Street, the GSEs and aggressive "financial
innovation" in response to a severely impaired banking system. Part of the
story would be how the U.S. economy consumed the "peace dividend" after the
collapse of the Soviet Union and frittered away the bounty associated with
the status as the only superpower and controller of the world's reserve currency.
There are, as well, the subplots of how the powerful Financial Sphere abused
its new prominence and how each time the Fed and policymakers ignored the real
issues and simply choose the inflation expedient to temporarily find their
way out of trouble.

I would suggest that the unprecedented inflation of dollar-denominated Credit
instruments has been the decisive catalyst for the momentous financial and
economic changes that the world is only now beginning to appreciate. The complete
breakdown in U.S. monetary discipline - operating at the "Core" of the global
financial system - has fostered a period of unlimited cheap global finance.
The Chinese, Indian and Asian, Russian and oil producing nations, and other
emerging economies would look a whole lot differently today were it not for
this backdrop of endless liquidity that has inflated global commodities, real
estate and securities markets, while promoting unprecedented ("Periphery")
capital investment.

Mr. El-Erian notes, "The systemic impact of this global realignment would
have been less dramatic were it not for a technical factor: the bout of financial
innovation triggered by the proliferation of derivative based instruments." I
would further emphasize that the commanding role of "contemporary finance" cannot
be overstated. But I suggest that the key dynamic has been the massive Credit
and Liquidity Inflation at the "Core" - the upshot of booming domestic lending,
securitizations, derivatives and securities finance/leveraging. The influence
of "financial innovation" in fostering dollar liquidity inflation has been
even more significant than its role in removing "barriers to entry" for the
emerging economies.

The "Core" versus "Periphery" analysis is especially critical when it comes
to the issue of sustainability. For some time, many analysts have presumed
that the emerging economies were invariably at the brink of a nineties-style
boom turned ugly bust. But the massive and unrelenting flood of liquidity emanating
from the U.S. Credit system (Current Account Deficits, speculative financial
flows, and investment flows) has to this point been more than adequate to finance
ongoing booms at the "Periphery." With this in mind, my analytical focus has
been - and remains - our powerful but aged U.S. Credit Bubble.

On a side note, I find it curious that Mr. El-Erian's analysis highlights
the impact financial innovation has had on "liquidity" and "velocity," while
maintaining a safe distance from the critical issues of Credit Availability
and Unrestrained Credit growth. To be sure, the "proliferation" of Credit Excess,
and resulting marketplace liquidity and speculative excesses, is the root of
today's unstable global financial and economic backdrop.

The divergence between the discernable escalation of global risks (financial,
economic and geopolitical) and the market's pricing of risk (i.e. overvaluation
and meager spread/risk premiums) is receiving a fair amount of attention of
late in Davos and elsewhere. From my perspective, spectacular global asset
inflations transpire only during - are products of - periods of underlying
Monetary Disorder - a circumstance today readily explained by Credit system
dysfunction at the "Core." Such a circumstance creates uncommon risks, as booming
asset markets are seen as confirming bullish perceptions and expectations.
Boom-time liquidity conditions and economic growth are then extrapolated far
into the future. Festering geopolitical issues are easily disregarded.

Lawrence Summers, commenting this week in Davos: "It's worth remembering that
markets were very upbeat in the early summer of 1914." Well, it is certainly
not unprecedented for global markets to rise spectacularly in the face of mounting
geopolitical risks. Indeed, the underlying (financial and economic) disorder
covertly fueling the boom can be expected to have complex and manifold causation
and, certainly, broad geopolitical ramifications. I believe the current Monetary
Disorder and resulting global boom are much the consequence of waning U.S.
financial and economic supremacy, replete with all the geopolitical risks associated
with such a historic development.

Credit Bubbles and their inevitable myriad inflationary effects are always
a wealth-redistributing phenomenon - and, accordingly, inevitably quite problematic.
Yet, for some period of time the liquidity and asset inflation effects do seductively
stimulate investment, wealth creation and robust economic activity. However,
the steep cost of the inflationary process begins to emerge later when inflation's
increasingly destabilizing effects promote myriad avenues of wealth destroying
behavior (mal/over-investment, resource misallocation, waste, fraud, and profligacy).
The growing divergence between waning wealth creation and the escalating expansion
of financial claims (the "scourge" of non-productive Credit Inflation) then
progressively heightens systemic risk. Still, for awhile the major inflation
in perceived financial wealth works to mask the underlying impairment to the
economic structure, while booming liquidity and asset prices ensure most (including
market professional and monetary policymaker) remain inattentive to risk dynamics.

Today we're in (and hoping to extend) the stage where the "Periphery" still
readily accepts and accumulates our increasingly suspect financial claims (securities
and debt instruments). The deepening impairment to the U.S. economy is obscured
by unrelenting Credit expansion - the whirlwind of new financial claims that
are accepted globally in exchange for needed goods/resources, as well domestically
to sustain the finance/asset inflation/"services"-based U.S. economy. At the
same time, inflating securities markets at home and abroad work to bolster
confidence, self-reinforcing Credit expansion, speculative excess, and continued
income and spending growth.

I continue to believe the probabilities are high that current dynamics are
brought to a conclusion by some type of financial dislocation. I certainly
recognize, however, that the weakened U.S. will act on every impulse to continue
its current inflation, while the ascending "emerging" economies will remain
steadfast in their pursuit of greater prosperity. So, for now, I'll ponder
ramifications for a continuation of an unstable status quo.

For the most part, analysts have missed key dynamics. The prevailing view
has been one of sanguine global integration of "emerging" economies' cheap
labor and manufacturing capacity, within the context of an ongoing technology
and productivity-induced boom in the developed world - the confluence of these
powerful forces pointing to a further secular decline in inflationary pressures.
This "disinflationary" backdrop, as the thinking goes, will pacify U.S. and
global central bankers and engender lower global market yields (and rising
global securities prices!) for some time to come.

The flaw in this line of thinking lies in its disregard for underlying Credit
Inflation and Bubble Dynamics, as well as a complete lack of appreciation with
regard to the inflationary ramifications of waning U.S. financial and economic
supremacy. In reality, there has been no secular ebbing of inflation, but instead
an alluring Secular Shift in Inflationary Effects. The bullish optimists were
snared by the inflationary boom's captivating initial facets - in this case
ones especially conducive to serious analytical and policymaker error (including
asset price inflation, muted CPI, generally robust growth, strong profits,
low market yields and massive global "Investment Inflation"). Additionally,
the marketplace's perception of a "disinflationary" backdrop and the Fed's
likely course of accommodation - in conjunction with a historic bout of financial
innovation - played a decisive role in fomenting the Global Credit Bubble and
unparalleled financial excess the world over.

As we now proceed to a much more problematic phase of a runaway global boom,
analysts and market operators are being forced to begin reexamining previous
assumptions. Instead of the placid inflation and interest rate environment
anticipated by the consensus, there is this highly inflationary global Credit
and liquidity backdrop requiring higher market yields and tighter Financial
Conditions than would have otherwise been the case. Or, stated differently,
the Structural Increase in Global Credit Availability and Marketplace Liquidity
will necessitate tighter-than-anticipated monetary policies by global central
bankers - in particular the Federal Reserve.

Until some development impedes the global Credit boom, monetary policy will
be dictated more by the need to lean against loose Credit Conditions and Global
Liquidity than any by any measure or index of consumer prices. How ironic that
this circumstance revealed itself as the leading proponent of "inflation targeting" was
assuming the helm of the Federal Reserve System.

The increasing awareness by holders of inflating quantities of suspect (dollar)
Credit instruments that they are being shortchanged should weigh on U.S. markets,
and keep in mind that strong U.S. markets have provided major support for our
faltering currency. And as the Bubble's inequitable (re)distribution of wealth
gains greater recognition, the strains between the "haves" and the "have nots" -
between debtor and creditor - between the U.S. and its highly liquefied competitors
for global resources - will surely intensify. The global grab for limited resources
should be expected to at some point turn more hostile, providing greater incentive
for the U.S. to inflate and for others to aggressively exchange dollar liquidity
for more attractive stores of wealth/value.

As Mr. El-Erian states, "the jury is still out as to what the destination" of
this "journey" will look like. A black tide of protectionism, nationalism,
radicalism, trade frictions, capital controls, and militarism certainly cannot
be ruled out as the ugly outgrowth of this historic inflationary boom. And,
from this perspective, the growing divide between the over-liquefied markets'
mis-pricing of risk and escalating financial and geopolitical risk is no conundrum.